BASILAN ESTATES, INC. v.

CIR
G.R. No. L-22492 September 5, 1967
Doctrine:
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not
matters of right. They are not created by implication but upon clear expression in
the law.
Facts:
Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the
basis of their acquisition cost. As of January 1, 1950 it changed the depreciable
value of said assets by increasing it to conform with the increase in cost for their
replacement. Accordingly, from 1950 to 1953 it deducted from gross income the
value of depreciation computed on the reappraised value.
CIR disallowed the deductions claimed by petitioner, consequently assessing the
latter of deficiency income taxes.
Issue:
Whether or not the depreciation shall be determined on the acquisition cost rather
than the reappraised value of the assets
Held:
Yes. The following tax law provision allows a deduction from gross income for
depreciation but limits the recovery to the capital invested in the asset being
depreciated:
(1)In general. A reasonable allowance for deterioration of property arising out of
its use or employment in the business or trade, or out of its not being used:
Provided, That when the allowance authorized under this subsection shall equal the
capital invested by the taxpayer . . . no further allowance shall be made. . . .
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not
matters of right. They are not created by implication but upon clear expression in
the law [Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965].
Depreciation is the gradual diminution in the useful value of tangible property
resulting from wear and tear and normal obsolescense. It commences with the
acquisition of the property and its owner is not bound to see his property gradually
waste, without making provision out of earnings for its replacement.
The recovery, free of income tax, of an amount more than the invested capital in an
asset will transgress the underlying purpose of a depreciation allowance. For then
what the taxpayer would recover will be, not only the acquisition cost, but also
some profit. Recovery in due time thru depreciation of investment made is the
philosophy behind depreciation allowance; the idea of profit on the investment
made has never been the underlying reason for the allowance of a deduction for
depreciation.

Fernandez Hermanos, Inc. VS. CIR- Allowable Tax Deductions

Income Taxation
That the circumstances are such that the method does not reflect the taxpayer s
income with reasonable accuracy and certainty and proper and just additions of
personal expenses and other non-deductible expenditures were made and correct ,
fair and equitable credit adjustments were given by way of eliminating non- taxable
items.
FACTS:
Four cases involve two decisions of the Court of Tax Appeal s determining the
taxpayer ' s income tax liability for the years 1950 to 1954 and for the year 1957.
Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and
respondent in the cases a quo respectively, appealed from the Tax Court's
decisions , insofar as their respective contentions on particular tax items were
therein resolved against them. Since the issues raised are inter related, the Court
resolves the four appeals in this joint decision.
The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for
the principal purpose of engaging in business as an " investment company " wi th
main office at Manila.
Upon verification of the taxpayer's income tax returns for the period in quest ion,
the Commissioner of Internal Revenue assessed against the taxpayer the sums of
P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged
deficiency income taxes for the year s 1950, 1951, 1952, 1953 and 1954,
respectively. Said assessments were the result of alleged discrepancies found upon
the examination and verification of the taxpayer's income tax returns for the said
years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No.
787, as follows:
ISSUE: The correctness of the Tax Court's rulings with respect to the disputed items
of disallowances enumerated in the Tax Court's summary reproduced
HELD:
That the circumstances are such that the method does not reflect the taxpayers
income with reasonable accuracy and certainty and proper and just additions of
personal expenses and other non-deductible expenditures were made and correct ,
fair and equitable credit adjustments were given by way of eliminating non-taxable
items.
Proper adjustments to conform to the income tax laws. Proper adjustments for nondeductible items must be made. The following non-deductibles , as the case may
be, must be
added to the increase of decrease in the net worth:
1. Personal living or family expenses
2. Premiums paid on any life insurance policy

3. Losses from sales or exchanges of property between members of the family

4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against public policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss
On the other hand, non- taxable items should be deducted therefrom. These items
are necessary adjustments to avoid the inclusion of what otherwise are non-taxable
receipts. They are:
1. inheritance gifts and bequests received
2. non- taxable gains
3. compensation for injuries or sickness
4. proceeds of life insurance policies
5. sweepstakes
6. winnings
7. interest on government securities and increase in net worth are not taxable if
they are shown not to be the result of unreported income but to be the result of the
correction of errors in the taxpayers entries in the books relating to indebtedness
MADRIGAL VS. RAFFERTY- Difference Between Capital and Income
Income Taxation
The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called capital. A
flow of services rendered by that capital by the payment of money from it or any
other benefit rendered by a fund of capital in relation to such fund through a period
of time is called income. Capital is wealth, while income is the service of wealth.
FACTS:
Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914.
The marriage was contracted under the provisions of law concerning conjugal
partnership
On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of
P296,302.73
Vicente Madrigal was contending that the said declared income does not represent
his income for the year 1914 as it was the income of his conjugal partnership with
Paterno. He said that in computing for his additional income tax, the amount
declared should be divided by 2.
The revenue officer was not satisfied with Madrigals explanation and ultimately, the
United States Commissioner of Internal Revenue decided against the claim of
Madrigal.

Madrigal paid under protest, and the couple decided to recover the sum of
P3,786.08 alleged to have been wrongfully and illegally assessed and collected by
the CIR.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided
into 2 in computing for the additional income tax.
HELD:
No! The point of view of the CIR is that the Income Tax Law, as the name implies,
taxes upon income and not upon capital and property.
The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called capital. A
flow of services rendered by that capital by the payment of money from it or any
other benefit rendered by a fund of capital in relation to such fund through a period
of time is called income. Capital is wealth, while income is the service of wealth.
As Paterno has no estate and income, actually and legally vested in her and entirely
distinct from her husbands property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax.
To recapitulate, Vicente wants to half his declared income in computing for his tax
since he is arguing that he has a conjugal partnership with his wife. However, the
court ruled that the one that should be taxed is the income which is the flow of the
capital, thus it should not be divided into 2.
MARUBENI CORPORATION V. COMMISSIONER OF INTERNAL REVENUE- Income Tax
The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co.
are not income arising from the business activity in which Marubeni Corporation is
engaged. Accordingly, said dividends if remitted abroad are not considered branch
profits subject to Branch Profit Remittance Tax.
Facts:
Marubeni Corporation is a Japanese corporation licensed to engage in business in
the Philippines. When the profits on Marubenis investments in Atlantic Gulf and
Pacific Co. of Manila were declared, a 10% final dividend tax was withheld from it,
and another 15% profit remittance tax based on the remittable amount after the
final 10% withholding tax were paid to the Bureau of Internal Revenue. Marubeni
Corp. now claims for a refund or tax credit for the amount which it has allegedly
overpaid the BIR.
Issues and Ruling:
1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf
and Pacific Co. are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to 15% profit remittance tax
imposed under Section 24(b)(2) of the National Internal Revenue Code.

NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with its
trade or business in the Philippines are subject to the 15% profit remittance tax. The
dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are
not income arising from the business activity in which Marubeni Corporation is
engaged. Accordingly, said dividends if remitted abroad are not considered branch
profits for purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of
the Tax Code, as amended.
2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.
Marubeni Corporation is a non-resident foreign corporation, with respect to the
transaction. Marubeni Corporations head office in Japan is a separate and distinct
income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf
and Pacific Co. was made for purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch in
the Philippines.
3. At what rate should Marubeni be taxed?
15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction
with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its
gross income from all sources within the Philippines. However, a discounted rate of
15% is given to Marubeni Corporation on dividends received from Atlantic Gulf and
Pacific Co. on the condition that Japan, its domicile state, extends in favor of
Marubeni Corporation a tax credit of not less than 20% of the dividends received.
This 15% tax rate imposed on the dividends received under Section 24(b)(1)(iii) is
easily within the maximum ceiling of 25% of the gross amount of the dividends as
decreed in Article 10(2)(b) of the Tax Treaty.
Note: Each tax has a different tax basis.
Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate,
as reflected in the phrase shall not exceed. This means that any tax imposable by
the contracting state concerned should not exceed the 25% limitation and said rate
would apply only if the tax imposed by our laws exceeds the same.
CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204
SCRA 377)
Income Taxation
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine
corporation. This rate goes down to 15% ONLY IF the country of domicile of the
foreign stockholder corporation shall allow such foreign corporation a tax credit
for taxes deemed paid in the Philippines, applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. However, such tax credit
for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount
equivalent to 20 percentage points

FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company
and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil
paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It
subsequently filed a claim with the Commissioner of Internal Revenue for a refund
or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal
Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only 15%.
MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.
HELD:
YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine
corporation. This rate goes down to 15% ONLY IF he country of domicile of the
foreign stockholder corporation shall allow such foreign corporation a tax credit
for taxes deemed paid in the Philippines, applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. However, such tax credit
for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount
equivalent to 20 percentage points which represents the difference between the
regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA
shall allow P&G USA a tax credit for taxes deemed paid in the Philippines
applicable against the US taxes of P&G USA, and such tax credit must reach at least
20 percentage points. Requirements were met.
NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic
corporation (owning 10% of remitting foreign corporation) shall be deemed to have
paid a proportionate extent of taxes paid by such foreign corporation upon its
remittance of dividends to domestic corporation.
b) 20 percentage points requirement: (computation is as follows)
P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax
P 100.00
- 35.00
65. 00 -- available for remittance
P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax
P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA
Dividends actually
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00
profits earned
P35 is the income tax paid.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income
tax deemed paid by the parent company. Since P29.75 is much higher than P13,
Sec 902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not
understand why these were divided and multiplied. Point is, requirements were met)
Reason behind the law:
Since the US Congress desires to avoid or reduce double taxation of the same
income stream, it allows a tax credit of both (i) the Philippine dividend tax actually
withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid
by P&G Philippines but deemed paid by P&G USA.
Moreover, under the Philippines-United States Convention With Respect to Taxes on
Income, the Philippines, by treaty commitment, reduced the regular rate of
dividend tax to a maximum of 20% of he gross amount of dividends paid to US
parent corporations, and established a treaty obligation on the part of the United
States that it shall allow to a US parent corporation receiving dividends from its
Philippine subsidiary a [tax] credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine [subsidiary].
Note:
The NIRC does not require that the US tax law deem the parent corporation to have
paid the 20 percentage points of dividend tax waived by the Philippines. It only
requires that the US shall allow P&G-USA a deemed paid tax credit in an amount
equivalent to the 20 percentage points waived by the Philippines. Section 24(b)(1)
does not create a tax exemption nor does it provide a tax credit; it is a provision
which specifies when a particular (reduced) tax rate is legally applicable.
Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity
investment in the Philippines by reducing the tax cost of earning profits here and
thereby increasing the net dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the Philippine dividend tax rate
unless its home country gives it some relief from double taxation by allowing the
investor additional tax credits which would be applicable against the tax payable to
such home country. Accordingly Section 24(b)(1) of the NIRC requires the home or
domiciliary country to give the investor corporation a deemed paid tax credit at
least equal in amount to the 20 percentage points of dividend tax foregone by the
Philippines, in the assumption that a positive incentive effect would thereby be felt
by the investor.